High taxes mean purchases out of state
Pub Date: 1/1/2003
By Cole Boehler, Editor/Publisher
The Montana Tavern Times
Last month's Montana Tavern Times carried an editorial that made the case that when prices for commodities with a relatively inelastic demand are inflated artificially by taxes, usually there is little impact on demand or consumption, even though that may be the purported goal of the tax advocates.
Tobacco, consumed by those with a physical addiction, and gasoline, consumed by those who need to travel, were cited as examples of commodities whose demands are relatively inelastic and whose consumption is affected only marginally by burdensome taxation.
Instead, the effect of the taxation usually amounts to no more than additional financial distress on consumers and some ballooning of government treasuries.
However, advocates of higher taxes on tobacco will note a decline in consumption in the high-tax jurisdiction and construe that as evidence taxes do depress demand.
What they may fail to recognize or admit is that the taxes cause significant distortions of otherwise rational consumer behavior, rather than actual consumption decreases.
Recently, my poor 92-year-old grandmother had her second "small" stroke, though when you're 92, no such event can be considered "small." (No, she has never smoked.) It affected her speech, coordination, strength, vision and even cognition when fatigue set in.
This meant that she would need to relocate hopefully temporarily to a nursing home for therapy, and it meant she needed moral support from her son, her grandchildren and her nieces and nephews, which, I'm happy to report, she has been receiving, including a visit from this grandson.
While visiting her in Bismarck, No. Dak., I also spent some time with some cousins there. We of course discussed the issues of the day, including what our respective legislatures and advocacy groups were doing to further regulate our lives and dictate our choices.
I noted in Montana, by an initiative boosted by health organizations, citizens had voted to impose a new $1 per pack tobacco tax on top of the already existing 70 ¢ per pack state tax, and that premium brands were now retailing for about $5.30 per pack.
One cousin, who is a smoker, said in North Dakota premium brands were selling for about $3.50-$3.75.
Sure enough, I came back to Montana with a bag full of smokes, having saved about $40 on 25 packs.
Now, I have a brother who lives in Sidney, just a stone's throw from the Montana-Dakota line. He frequently crosses the border on business and to visit relatives. Will he be getting a request from me to when across the line purchase this cheap tobacco? Sure.
And it is evident many smokers have simply switched to loose tobacco and are rolling their own in order to reduce their personal tax and financial burden.
In the region, Montana has the third highest tax, exceeded only by Oregon and Washington. Idaho, Utah, Nevada, North Dakota (about half of Montana's), New Mexico, Wyoming (about 40 percent of Montana's), Colorado, South Dakota (about one-fifth of Montana's) and Arizona are all lower.
So, Montana's exorbitant tax has certainly resulted in market distortions. Will Montana's anticipated tax collections fall short? Of course, and they are. Will consumption decline? Perhaps, but not by the amount that will be reflected by declining tobacco sales in the state. Many consumers will find other low-tax or no-tax sources outside the state for this commodity with its inelastic demand.
Already, some high-tax states have lost so much tobacco tax revenue to sources outside their jurisdiction they are taking extraordinary measures to stem the shrinkage. Some are attempting to stop tobacco sales over the internet by bullying credit card companies into curbing charge card use in such purchases. Others are pleading with media to not accept advertising for low-tax tobacco.
Which begs the question: are high tobacco taxes about curbing consumption or fattening government coffers (no pun intended).
I might note, North Dakota liquor sells for considerably less than Montana's as well, again due to tax differences. It is clear Montana consumers have been buying liquor for personal consumption in significant quantities outside the state in low-tax jurisdictions like Nevada for years. I know of folks who bring trunk loads of booze back from trips to Nevada. I brought a litre of Bacardi Dark back with me from the east.
Tax advocates will not admit Montana has a problem with its high tax rates'; rather, they will tell you, North Dakota and Nevada have a problem with their low tax rates. They will likely begin to lobby in neighboring jurisdictions for higher taxes there to "correct" the cross-border tax inequities.
What folly.
Source: The Montana Tavern Times, April, 2005, published monthly by Continental Communications, 125 W. Granite St., Suite 102, Butte, MT 59701.